IMF calls on US banks to complete Dodd-Frank reforms

Government and regulators in the United States need to finish financial reforms in order to move to a safer financial system, according to the latest IMF assessment.

In response to the GFC, the US passed a major law in 2010, the Dodd-Frank Act, to reform its financial system. But the IMF report says officials still need to finish the regulatory agenda set out in that landmark legislation.

The IMF assessed progress to date, and looked at stress tests administered by US financial supervisors. It concludes that supervisory solvency stress tests for banks are "state-of-the art in many respects", but officials need to improve stress tests of nonbanks, such as insurance companies, mutual funds, and pension funds.

It calls for both solvency and liquidity stress tests for nonbanks and examination of spillover risks between nonbanks and banks.

The IMF acknowledges the steps taken by US authorities to address the "too big to fail" issue in banks, but says they still need to put in place enhanced standards and resolution powers for systemically important nonbanks, and to ensure the work on developing "living wills" for systemically-important banks is completed.

The IMF says its analysis suggests insurance companies, hedge funds, and other managed funds "contribute to overall financial risks in amounts larger than suggested by their size, and therefore deserve greater attention." Officials should develop and perform insurance stress tests on a consolidated, group-level basis, and there should be an independent national regulator for the insurance industry, it says.

The report says that, although US banks appear stronger and healthier,  they are also bigger and more interconnected than five years ago  - and new risks have emerged.

"Years of low interest rates have sent investors looking for higher returns on their investments, which has lead to a build-up of risks, particularly in less regulated areas of the financial system," it says.

"Key fault lines that remain unaddressed include money market funds, securities lending, and the triparty repo markets—where securities dealers find short-term funding for their own and their clients' assets—and housing finance," the report says.